[EDITED 05/08/2009: see here] We are finally ready to go semi-public with our revolutionary new angel funding concept! For the last year, Dave Lambert (the Tiltboy also known as Diceboy) and I have been working on an alternative mechanism for delivering seed funding to technology companies. [REDACTED 05/08/2009: see here].
Here’s the summary. The market for seed capital is clearly broken. Most individual angels will only do about 1 deal per year, which means their portfolios lose money 40% of the time due to insufficient diversification. Even premier angel groups like the Band of Angels say they only do about 8 deals per year. Our math says you need to do 125 to achieve good diversification. On the other side of the table, only 14% of entrepreneurs who want angel funding will find it. Those that do will spend about 6 months looking for money instead of building their businesses.
This is a sorry state of affairs for a market where the overall annual return is 25%+. Here’s a straightforward application of portfolio theory that can fix it. Have a large enough pool of money so one entity can do 125-200 deals per year. Then use an online screening process to give founders a yes or no in two weeks. Obviously, there are a ton of details beyond this, but those are what we’ve spent the last year figuring out. If you’re curious, let me know in a comment here and I will contact you privately.[Links to files REDACTED 05/08/2009: see here].
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Michael 2:02 pm on April 21, 2009 Permalink |
Sounds like a smart model. Where shall I forward my executive summary?
Rachael Qualls 4:06 pm on April 24, 2009 Permalink |
We should really talk.
I founded an Angel Investing organization in 2007 with the intention of trying to figure out a sustainable model to alleviate some of the issues you discussed.
Obviously I have an opinion or two on the subject if you would like some insight.
Rachael Qualls
Founder/CEO
Angel Capital Group
You Can’t Pick Winners at the Seed Stage « The Emergent Fool 11:31 am on April 27, 2009 Permalink |
[...] 27, 2009 by kevindick The majority of people like our idea for revolutionizing angel funding. Among the skeptical minority, there are several common objections. Perhaps the weakest is that [...]
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Notional Slurry » links for 2009-07-29 11:02 pm on July 29, 2009 Permalink |
[...] Revolutionizing Angel Funding « The Emergent Fool "Here’s the summary. The market for seed capital is clearly broken. Most individual angels will only do about 1 deal per year, which means their portfolios lose money 40% of the time due to insufficient diversification. Even premier angel groups like the Band of Angels say they only do about 8 deals per year. Our math says you need to do 125 to achieve good diversification. On the other side of the table, only 14% of entrepreneurs who want angel funding will find it. Those that do will spend about 6 months looking for money instead of building their businesses." (tags: investment workantile IFM business-culture business-model startups project-driven worklife entrepreneurs) [...]
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[...] investment opportunities. I’ve been meaning to post for three months now about Revolutionizing Angel Funding on The Emergent Fool. That post, by Richard Dick, talks about setting up a system to process [...]
Alex Bernstein 4:10 pm on August 5, 2009 Permalink |
Hi Kevin,
We’ve put two years into a web based application for deal analysis that we license to nearly two dozen angel groups.
You might want to save some time by using what’s already in place. You can watch a demo video and see a sample output report on the website below.
http://www.venture360report.com
happy to set up an account so you can give it a test drive.
Alex
kevindick 5:17 pm on August 5, 2009 Permalink |
Alex, thanks for you comment.
I’m familiar with venture360. It’s definitely a better tool than going with gut feel. However, our thesis is that subjective evaluations of any kind are unlikely to offer much predictive benefit (i.e., alpha) at the seed stage. So we are almost completely avoiding this type of scoring approach.
kevindick 2:06 pm on April 21, 2009 Permalink |
Once we have an anchor investor for the fund, we’ll put up a Web site with our automated application process. We estimate it will take 6-12 months to reach this milestone, if things go reasonably well (i.e., no more major macro crises).
Vaclav Kirsner @bioZhena 3:38 pm on January 7, 2010 Permalink |
I respectfully suggest that you think very carefully about any “application” or “processing” fee. Too many experiences lead to the conclusion that whoever does that is in the business of just collecting these monies, however “modest” they may be (which often modest they are not). Put another way, that they have no incentive to produce once they’ve collected.
This is no theory but a reflection on some disgusting experiences. The last (which I acquired having gone against my better judgment, against the previously concluded rule of no-money-upfront) was with a new quest – alluding firm whose founder CEO succeeded in impressing me as a well-spoken former stockbroker or similar who, I kidded myself, would surely not stoop to such lows that we have run into over the years. Wrong. Took a few hundred bucks never to be heard from again, despite their decent if not perfect website and all that.
I am sure they too meant well for entrepreneurs and entrepreneurship. But, mainly their own enterprise, apparently. It really is distasteful what these various people, offering to fund us, will do – and that is even before we get anywhere near a term sheet and all that! (After all, they are not the check writers…)
What logic or business ethic is to rationalize that an entrepreneur, who has put much much money and many years into the project, should fund yours? That they should support your doing business?